DeFi Should Be Off-Limits For CFTC, Says Coinbase CEO

Coinbase, one of the world leaders in crypto services, is currently battling accusations of improper conduct in U.S. courts. The platform’s legal representatives have denied any wrongdoing, even going so far as to request the dismissal of the case.

In spite of the accusations, Coinbase – and the platform’s CEO, Brian Armstrong – are generally viewed as a positive force in the market by institutional investors and even policymakers. As previously reported by CryptoPotato, Armstrong met with House Representatives in order to discuss upcoming legislation regarding cryptocurrencies.

Coinbase is, however, a centralized platform and has made no claims of being decentralized. This is why Armstrong shared his thoughts on legal issues that may be faced by his decentralized peers.

CFTC’s Behaviour May Have Unintended Consequences

According to Armstrong, the CFTC should not be going after DeFi protocols, as their authority to do so is tenuous at best and actively harming the industry’s prospects at worst.

The CFTC should not be creating enforcement actions against decentralized (DeFi) protocols. These are not financial service businesses, and it’s highly unlikely the Commodity Exchange Act even applies to them.

My hope is these DeFi protocols take these cases to court to…

— Brian Armstrong 🛡️ (@brian_armstrong) September 13, 2023

The CFTC, however, holds a different view of DeFi’s role, as highlighted by CFTC Enforcement Division Director Ian McGiley following a recent enforcement action against three such protocols.

“Somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not. The DeFi space may be novel, complex, and evolving, but the Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow U.S. persons to trade digital asset derivatives.”

This view is mirrored by some of Coinbase’s community, who leveled criticism at Armstrong’s statement.

Does DeFi Live Up to its Name?

X users were quick to point out that Armstrong’s statement that “DeFi protocols are not financial services” seemingly contradicts the Fi part of DeFi.

““Decentralized (DeFi) protocols. These are not financial service”? Did you not forget one word here? What does “Fi” stand for?”

Other users pointed out that the mere possibility of a DeFi protocol being taken to court proves that said project is not decentralized in the slightest.

the fact the the Defi protocols can even “take these cases to court” show just how decentralized they really are

— TylerBTC (@TylertBTC) September 13, 2023

If a project were truly decentralized, there would be no individual or company capable of standing trial for alleged financial misdeeds since the mere creation of a protocol is not illegal.

For the CFTC to stop going after DeFi, the platforms targeted by regulators would have to prove that they truly are decentralized – with no master keys, backdoors, and so on.